10 Appraisal terms you should know

10 Appraisal terms you should know

If you’ve ever gotten a home appraisal for either a home equity loan, refinance, or home purchase you may have looked over it and wondered what some of the terms used mean. Today I thought I would share 10 appraisal terms you should know in the hopes that it will help you better understand the appraisal report.

Deferred maintenance- Deferred maintenance consists of repair items on the house that should be fixed immediately but have not yet been repaired. It is usually smaller type items like a broken window, peeling paint, hanging gutters, etc. It does not consist of larger items such as the roof, heating and cooling system, or anything to do with the structure of the home. Deferred maintenance items usually fall under the “cosmetic” category and includes the items that you would work on to help increase the curb appeal of your home.

Functional obsolescence- This usually has to do with the design of your home but can also include items related to the structure or materials used in the homes construction. A common form of functional obsolescence in older homes is when it is necessary to pass through a living room or bedroom to get to another bedroom. This could disturb the occupants of the room and is not a desirable feature. I’ve also seen older homes with one bathroom located in a bedroom, making it necessary to go through the bedroom to get to the bathroom, again disturbing the occupants. There are both curable and incurable forms of functional obsolescence. If it is practical and financially possible to correct the mistake then it is considered curable, if not then it would be incurable.

Effective age- I wrote a longer post previously about effective age, so if you want to you can read it as well. Effective age is a term that describes the age a home “appears” to be. If it has had extensive updates and remodeling then its effective age will be lower than a home that has not had any renovations. The floor plan layout of a home can also change the effective age of a home. If you have a 60 year old home that has problems with its floor plan layout like I described above, its effective age can be lowered by reconfiguring the layout to meet today’s standards.

Arm’s-length transaction- An arm’s-length transaction is one in which both buyer and seller are equally motivated in the sale with neither being pressured to sell for less than the property is worth. Examples of sales that are not arm’s-length transactions include a divorce and/or a short sale. During a divorce sale the sellers may be interested in selling their home quickly, which can result in the price being lower than normal. As in all situations, the motivations surrounding a sale should be investigated because there are situations where this type of sale can be arm’s-length, but I have found that the majority are lower than other recent sales. The short sale is another situation where the motivations surrounding the sale result in it selling for less. A short sale involves a home selling for less than what is owed on it which is typically below market value.

Gross living area- This term, which is typically abbreviated as GLA, describes the heated and cooled, above grade living area of a home. The price per square foot of a home is calculated by dividing the sold price by the GLA. Even though finished basement area is NOT included in GLA it is still given credit. The price per square foot of a home reflects all of the value added features of a home, including finished basement area.

“As-is” value- Most appraisals are made with the subject property in “as-is” condition, meaning that the opinion of value given by the appraiser reflects the condition of the property on the date the appraiser visited the house. It takes into consideration deferred maintenance and functional obsolescence that I previously mentioned.

“Subject to” value- This type of value is the opposite of the “as-is” value in that the opinion of value reflects what the value will be whenever certain conditions are met. These conditions usually reflect work that is to be done such as repairs, or in the case of a proposed construction, it reflects the value of a  home after it is built. If you are building a home and borrowing money from the bank to do so, the bank wants to know what the house will be worth if it were built today using certain specifications. The appraiser obtains the plans and construction specifications from the builder and develops an opinion of value based on them.

Comparables- I included this term, as well as the next one, because people use them interchangeably when in fact there are some important differences between the two. A comparable is a house that has sold that is similar to the home being appraised based on certain criteria. This criteria typically includes similarities in quality, condition, appeal, square footage, time of sale, price range and functional use.

A great question to ask yourself when determining whether a sale is a comparable is this: “would the buyer of the subject home also look at this other house as an alternative? A buyer for a 3 bedroom, 2 bath home would probably not consider a 5 bedroom, 3 bath home with a finished basement and a pool as a possible alternative due to its price, size, and amenities. If this is the case then it should not be used as a comparable.

Sales- When speaking at real estate agent’s offices I always remind them that while a comparable is always a sale, a sale is not always a comparable. Even though it may have occurred recently and is nearby there may still be enough differences that the buyer for the subject property would not consider this sale as an alternative option.

An example I recently ran across involved a home that I was doing a pre-listing appraisal on. A home two lots away had sold within the past 90 days and was very similar to mine, but there was one problem. The home was just over the county line and was zoned for different schools. Even though the home was nearby, similar in age, size, and design and appeal, it was in a different school system that would not be similar to the one I was appraising.

I had to go further away to find a similar sale that was in the same school system that a potential buyer would also consider. Finding good comps is not always cut and dried because they are close to the one you are appraising or pricing so it is important to qualify your sales so that they are considered comparable and good alternatives to potential buyers.

Drive-by appraisal- When my son was younger I would take him around with me when doing appraisal work such as taking pictures of comparables sales or on drive-by appraisals. One time he asked me what we were doing and I told him I was doing a drive-by appraisal, and he got scared all of a sudden. After calming him down and talking with him about it he told me he thought we would be shooting at people because the only drive-by he had heard about occurred when people were shooting at others from their cars.

A drive-by appraisal does not involve any guns but rather is a form of appraisal inspection in which you observe a home your are appraising from the street only. It does not involve going inside the house or measuring it so it can be less accurate than a full interior inspection appraisal. The important thing about a drive-by appraisal is getting accurate information regarding the interior quality of construction, materials of construction, and correct square footage (GLA).

It is the appraiser’s responsibility to determine if they have accurate sources of information to do this type of assignment. My policy is that if I cannot get accurate information I will not do a drive-by and will request access to the interior so that accurate information can be obtained.

Question

Do you have a question about another term you’ve seen? This is not a complete list of terms you might see in an appraisal so if you have a questions regarding another one you’re unsure of feel free to contact me and I’ll leave a comment below explaining it. Thanks for reading and have a blessed day!

If you liked this post subscribe by email (or RSS feed). Thanks for visiting.